Risk-off positioning has returned to dominance in global markets, which in currency markets has meant yen and Swiss franc gains juxtaposed to underperformance in the dollar bloc, other commodity currencies and many developing world currencies, with the dollar in the middle of these groups, losing group to its major peers while gaining versus currencies with higher beta characteristics. The yen and most other safe haven currencies and assets remained off recent highs, including the U.S. 10-year T-note, which according to some market narratives reflects recent profit taking in safe haven positioning to offset losses elsewhere. Regarding the dollar, the CME FedWatch Tool is showing that market positioning is implying a near 90% probability for the Fed to cut by 100 bps at the upcoming March 17th-18th FOMC meeting, which would bring in zero interest rates to the U.S. It looks just a matter of time before Treasuries join the negative-yielding club. The prevailing wave of risk aversion follows the WTO yesterday labelling the coronavirus outbreak as a pandemic for the first time. Markets were also underwhelmed by U.S. President Trump's address yesterday, which has seen S&P 500 futures hit 5% limit-down, which followed the cash version of the index closing on Wall Street yesterday with a hefty 4.9% loss. Trump's 30-day travel ban between the U.S. and Europe (UK excluded) has been a particular concern, along with the still low level of testing for Covid-19 in the U.S. and absence of targeted stimulus measures to offset a likely fall in consumption. More generally, the impact of the increasingly widespread restrictions on daily life, whether forced or voluntary, across the world is clearly disrupting economic activity significantly.

[EUR, USD]EUR-USD has remained heavy despite market positioning in the fed fund futures markets is implying a near 90% probability for the Fed to cut by 100 bps at the upcoming March 17th-18th FOMC meeting, which would bring in zero interest rates to the U.S. It looks just a matter of time before Treasuries join the negative-yielding club. What's been happening is that the recent pronounced narrowing in U.S. Treasury over Bund yield spreads has based out. The 10-year T-note over 10-year Bund yield spread has widened from about 122 bp to back above 150 bp over the last several days, marking a shift from a strongly bullish dynamic for the EUR-USD pairing, to a bearish one. This comes amid expectations for the ECB to deliver an additional raft of easing measures at its policy meeting today. There isn't much room for rate cuts, although a 10 bp cut in the deposit rate is a possibility, even if this will have largely a signalling effect. More targeted loan programs to secure funding for companies hit by virus disruptions are likely, along with a revamping in QE. Given the deepening sense of crisis caused by the coronavirus spread, the nationwide lock-down in Italy and Washington-imposed travel ban between the U.S. and Europe, the ECB is likely to take bold action. We have been arguing that recent strong gains in EUR-USD are likely to have been a sizeable rotation higher to a new trading band rather than the beginning of a long-term bull trend.

[USD, JPY]The yen has returned to outperformance as risk aversion took a fresh grip in global markets. USD-JPY dropped to a 103.10 low. The pair remains above the four-year low that was seen on Monday at 101.21, though a revisit here and drop below 100.00 are looking probable. Market positioning in the fed fund futures markets is implying a near 90% probability for the Fed to cut by 100 bps at the upcoming March 17th-18th FOMC meeting, which would bring in zero interest rates to the U.S. It looks just a matter of time before Treasuries join the negative-yielding club. The BoJ, in contrast, has less room for monetary policy manoeuvre, while the yen is widely seen as a natural safe haven currency, with Japan not depending of foreign investment inflows to sustain financing and with Japanese investors apt during times of risk aversion in global markets to repatriate capital from the sale of foreign assets, and/or put on currency hedges on foreign assets. Survey data released today showed large Japanese manufacturers' business sentiment fell to a nine-year low in Q1, which will keep the BoJ under pressure to loosen monetary policy at its upcoming policy review on March 18th-19th. BoJ Governor Kuroda said the central bank has been providing ample liquidity and stepping up asset purchases. The prevailing wave of yen-supportive risk aversion follows the WTO yesterday labelling the coronavirus outbreak as a pandemic for the first time. Markets were also disappointed by U.S. President Trump's address yesterday, which has seen S&P 500 futures come within a whisker of reaching the 5% limit-down stop mark, and which followed the cash version of the index closing on Wall Street yesterday with a hefty 4.9% loss. Trump's 30-day travel ban between the U.S. and Europe (UK excluded) has been a particular concern, along with the still low level of testing for Covid-19 in the U.S. and absence of targeted stimulus measures to offset a likely fall in consumption. More generally are the very real worries about the impact of the widespread restrictions on daily life now in place across the globe will have on the global economy.

[GBP, USD]The pound has been trading mixed amid risk aversion in global markets, gaining versus the dollar bloc and other high-beta currencies, while falling versus the yen. The pound has also been losing losing ground to the dollar, aided by the BoE's 50 bp rat cut yesterday, which was a largely unexpected intra-meeting emergency move. This took the repo rate to 0.25%. Cable has printed a nine-day low at 1.2739, nearing the five-month low that was seen in late February at 1.2725. The government backed-up the BoE's rate cut with a massive GBP 30 bln fiscal spending plan, which was detail during its 2020-21 budget presentation before parliament yesterday, though this didn't have much supportive impact on the pound, a currency that tends to find itself on the underperforming list of currencies during protracted periods of risk aversion in global markets (given the UK's dependent on foreign investment to fund its current account deficit). The BoE stated that "Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months." The BoE also introduced a new term funding scheme for small businesses, offering four-year funding over the next 12 months, while the central bank’s Financial Policy Committee also lowered the counter-cyclical capital buffer for banks to zero from 1%. Going forward, we expect the pound to be prone to underperformance. With the UK and Eurozone at risk of recession, this is not a good time for trade negotiations between the UK and EU, and the UK's desire to leave the post-Brexit transition membership of the EU's single market and customs union at the end of the year.

[USD, CHF]EUR-CHF has ebbed back under 1.0600 over the last day, and looks likely to breach the five-year low that was seen on Monday at 1.0505. Safe haven demand for the Swiss currency has returned amid heightening concerns about the global economic disruptions being caused by efforts to contain the coronavirus. The U.S. in January added Switzerland to its list of currency manipulators. The move seems a bit rich given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index), though the Trump administration argues that Switzerland needs a more expansive fiscal policy.

[USD, CAD]USD-CAD has extended to a fresh four-year high at 1.3821 today amid an acute phase of risk-off positioning in global markets amid deepening concerns about the economic disruption that the spreading coronavirus is both causing and will eventually cause. Oil prices have taken a fresh 5%-plus tumble, which is a cue to sell the Canadian dollar, although so far have remained above recent lows. Front-month WTI futures dropped just over 5% to a low at $30.69. The low see on Monday, following the worst-in-nearly-three-decades 30%-plus crash, is $27.34. The Canadian dollar will remain subject to near-term volatility and overall underperformance as long as the coronavirus contagion remains in a state of increasing spread.